It’s been a tough few years for the theater business, and it’s been particularly brutal in San Francisco. Since the pandemic began, the city has lost the Embarcadero Center Cinema, the Century Theatres in the Westfield Mall and CinéArts at the Empire.
But for sheer financial calamity, it would be hard to top the CGV Cinemas, a 14-screen multiplex in the Tenderloin. South Korea’s largest movie chain opened the theater in September 2021. It closed 18 months later, a victim of the pandemic and urban decline.
The total damage: a whopping $54 million.
How is it possible to lose that much money on one theater, without even owning it? CGV, like most theater operators, was a tenant. And like a lot of theaters, it couldn’t pay its rent.
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But while other chains were able to cancel or renegotiate their leases, often through bankruptcy, CGV either couldn’t or wouldn’t do that. Instead, the company ended up buying the commercial building outright and handing it over, virtually for free, to a local investor.
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CGV is now locked in a legal battle with its former attorneys, after being ordered to pay a hefty “success fee” for getting the chain out of its lease.
Court records show that CGV was keen to avoid embarrassment associated with the deal. According to an arbitration ruling, executives feared that any whiff of negativity would be picked up by the South Korean media, and that bad publicity could empower a group of dissident shareholders. So the company was willing to pay an extremely high price to keep its failure a secret.
CGV is part of CJ Group, a conglomerate that includes “Parasite” producer CJ ENM and the Bibigo food brand. The theater chain opened its first U.S. location in 2008, a three-screen cinema in Los Angeles’ Koreatown neighborhood, and later opened an eight-screen theater in Orange County, as it plotted a global expansion.
In 2018, CGV signed a 20-year lease on a historic building on Van Ness Avenue in San Francisco. Built in 1921, the building originally served as a Cadillac showroom on the city’s Auto Row. Though it had since been turned into an AMC, it retained historic touches such as an ornate double staircase, and, over the entrance, a Cadillac crest flanked by nude terra cotta figures holding tools and automobile wheels.
CGV spent $14.8 million to transform it into a state-of-the-art theater, including a 4DX auditorium equipped with synchronized motion seats. It was an optimistic bet. The surrounding neighborhood was struggling with high vacancy rates, open drug use and a growing homeless problem.
By the time the theater actually opened, a year into the pandemic, the theatrical business had cratered. Though pristine, the location was often nearly empty. CGV quickly fell behind on its rent payments and ultimately closed.
But the company could not simply walk away. Its Korean parent had signed a $75.2 million guaranty to the landlord, a real estate investment trust. CGV hired a bankruptcy firm, Pachulski Stang Ziehl & Jones, to try to work out a deal.
Unfortunately, the landlord was interested in only one outcome. It offered to sell the building to CGV for $28 million. CGV did not want the building. It offered to give the landlord $28 million in cash, but the landlord refused — it had to be a sale.
Not only did CGV not want the building, it did not want to be publicly tied to a legal dispute over a defaulted lease. Ultimately, it agreed to buy the building and flip it instantly to a local investor, in exchange for little or nothing, without CGV ever appearing on the title.
Why would it do that? According to the arbitrator in its fee dispute, CGV feared that “bad optics” might disrupt a $700 million capital raise.
“The CGV Parties wanted to avoid the adverse publicity which would arise if it became known that they owned property in an American city in decline like San Francisco,” wrote the arbitrator, Bruce Isaacs. “And, ironically, the CGV Parties wanted to avoid the adverse publicity which would arise if it ever became known that they gave away a valuable piece of commercial property in San Francisco essentially for free.”
If it could avoid paying the full guaranty, CGV had agreed to pay Pachulski Stang a fee based on a percentage of its savings. After completing the sale, CGV refused to pay, arguing that it had lost $28 million on the transaction.
In February, Isaacs ordered CGV to pay the firm $10.7 million. Isaacs found that CGV could have minimized its losses, or even turned a profit, by holding onto the property. Therefore, Pachulski Stang was entitled to the success fee.
The law firm filed a petition to confirm the award on March 10. CGV has indicated it will seek to vacate the award, which its attorneys called “flawed and fundamentally deficient.”
The theater chain announced a restructuring earlier this month, as it closed four theaters in South Korea and shed 80 employees due to struggling box office results.
Meanwhile, in San Francisco, the new owner of the building is still trying to rent it out.
